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Lecture #22 – Monday, March 29, 2004
ADVANCES FROM THE BANK OF CANADA
Suppose the reserve rates at the chartered banks fall below the desired ratio. They borrow funds from the
Bank of Canada:
Reserves: +100 (DD at
Bank of Canada)
Advances from Bank of
Bank of Canada
Advances to Chartered
DD: +100 (Chartered
• No direct increase in the money supply – rare case, usually repaid quickly.
• Bank Rate: Interest rate charged by the Bank of Canada for advances.
• Reflects the short-term interest rates – influences the interest rates.
• Can either encourage/discourage banks to keep reserves – indirectly expand or contract money
FOREIGN EXCHANGE MARKET
Canadian Dollars Foreign Exchange
Import ↑: Supply ↑ Demand ↑
Export ↑: Demand ↑ Supply ↑
Capital Inflow ↑: Demand ↑ Supply ↑
Capital Outflow ↑: Supply ↑ Demand ↑
EXCHANGE RATE SYSTEMS
Consider a rise in Can/F. Foreign exchange is
now more valuable:
• S is positively sloped: X↑, FE supplied ↑.
• D is negatively sloped: M↓, FE demanded ↓.
• Depreciation in Canadian dollars.
Flexible Exchange Rates
Government doesn’t intervene – demand and supply determine the exchange rate.
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